Equity firm’s investments could signal CSP consolidation
CSP consolidation could be picking up. How will this impact operational and business support systems and digital transformation?
17 Sep 2020
Equity firm’s investments could signal CSP consolidation
New York-based private equity firm KKR has been busy increasing its positions in European telecommunications firms, often partnering with sovereign wealth funds to purchase infrastructure-centric assets at a discount. While overall private equity deals in telecom have declined since 2016, KKR’s activity appears to have increased and may presage a wave of consolidation in crowded European telecom markets. This could have a serious impact on IT systems and digital transformation.
Earlier this month, KKR agreed to purchase 37.5% of FiberCop, which aims to build Italy’s first ultrafast broadband network. FiberCop’s ownership includes TIM and Fastweb. By purchasing FiberCop, KKR will inherit TIM’s secondary fiber network as well as the fiber network owned by the TIM-Fastweb joint venture FlashFiber. The new entity will offer passive access services to other operators on a wholesale basis.
TIM’s board has also reportedly approved a “preliminary deal” to combine FiberCop with Italy’s Open Fiber network to create a single national network operator backed largely by CDP Equity, Italy’s sovereign wealth fund. On the surface, this looks like a low-risk investment for KKR to benefit from predictable cash flow and ownership in a set of modern network assets, the demand for which continues to grow.
On June 1, 2020, KKR announced it had made a board-backed bid of $3.3 billion for Spanish mobile operator Masmovil. Though Masmovil is considered Spain’s fourth operator, the company had previously gained market share and infrastructure through M&A. KKR and Masmovil’s other investors could be well positioned to benefit from a quick flip in a Spanish market that may, like the UK market, be ripe for consolidation.
In late August 2020, it was widely reported that KKR is weighing a bid for BT, which experienced a 50% drop in its share price between December 2019 and July 2020. The conventional wisdom says that BT’s hard assets, such as its broadband network division Openreach, are worth far more than the company’s market value. This drives speculation that a firm like KKR would intend to acquire BT, break it up and sell off the parts at a multiple (a tactic so common to investment banking it was described in the romantic comedy Pretty Woman).
KKR’s approach does not appear to be mysterious. On one hand, the firm is taking low-risk positions, generally at a discount and with partners like sovereign wealth funds, in infrastructure plays that promise predictable cash flow, such as in Italy’s FiberCop. On the other, the firm is buying cash-generating infrastructure assets with an opportunity to sell them at a premium in markets primed for consolidation, such as in Spain.
One of the practical challenges in a consolidating market or a market where CSPs are broken up or restructured is disruption to near- and long-term roadmaps for operational and business support systems (OSS/BSS).
CSPs have focused on building integrated fixed, mobile and TV businesses to encourage one-stop-shopping, increase customer loyalty, and drive cost out of their businesses through converged network and customer organizations. But “the attraction of the converged operator business has not necessarily been reflected in their share prices,” says Mark Newman, TM Forum’s Chief Analyst.
As a result, CSPs may be positioned for an influx of investment bankers looking to break CSPs into separate network and service operations, for example. Break-ups would run counter to the effort and investment made most recently in IT transformation, integration and consolidation.
Earlier this month, KKR agreed to purchase 37.5% of FiberCop, which aims to build Italy’s first ultrafast broadband network. FiberCop’s ownership includes TIM and Fastweb. By purchasing FiberCop, KKR will inherit TIM’s secondary fiber network as well as the fiber network owned by the TIM-Fastweb joint venture FlashFiber. The new entity will offer passive access services to other operators on a wholesale basis.
TIM’s board has also reportedly approved a “preliminary deal” to combine FiberCop with Italy’s Open Fiber network to create a single national network operator backed largely by CDP Equity, Italy’s sovereign wealth fund. On the surface, this looks like a low-risk investment for KKR to benefit from predictable cash flow and ownership in a set of modern network assets, the demand for which continues to grow.
Mobile network in Spain
On June 1, 2020, KKR announced it had made a board-backed bid of $3.3 billion for Spanish mobile operator Masmovil. Though Masmovil is considered Spain’s fourth operator, the company had previously gained market share and infrastructure through M&A. KKR and Masmovil’s other investors could be well positioned to benefit from a quick flip in a Spanish market that may, like the UK market, be ripe for consolidation.
Kicking BT’s Tires in the UK
In late August 2020, it was widely reported that KKR is weighing a bid for BT, which experienced a 50% drop in its share price between December 2019 and July 2020. The conventional wisdom says that BT’s hard assets, such as its broadband network division Openreach, are worth far more than the company’s market value. This drives speculation that a firm like KKR would intend to acquire BT, break it up and sell off the parts at a multiple (a tactic so common to investment banking it was described in the romantic comedy Pretty Woman).
What’s the end game?
KKR’s approach does not appear to be mysterious. On one hand, the firm is taking low-risk positions, generally at a discount and with partners like sovereign wealth funds, in infrastructure plays that promise predictable cash flow, such as in Italy’s FiberCop. On the other, the firm is buying cash-generating infrastructure assets with an opportunity to sell them at a premium in markets primed for consolidation, such as in Spain.
KKR’s sudden uptick in telecom activity may be due to a perfect storm of undervalued assets, the search for reliable yield in a zero-interest rate environment, massive projected growth in data and mobile communications, the economic disruption and technology acceleration Covid-19 has triggered, and crowded telecom markets ripe for large-scale mergers, which firms like KKR can influence.
What break-ups would mean for OSS/BSS
One of the practical challenges in a consolidating market or a market where CSPs are broken up or restructured is disruption to near- and long-term roadmaps for operational and business support systems (OSS/BSS).
CSPs have focused on building integrated fixed, mobile and TV businesses to encourage one-stop-shopping, increase customer loyalty, and drive cost out of their businesses through converged network and customer organizations. But “the attraction of the converged operator business has not necessarily been reflected in their share prices,” says Mark Newman, TM Forum’s Chief Analyst.
As a result, CSPs may be positioned for an influx of investment bankers looking to break CSPs into separate network and service operations, for example. Break-ups would run counter to the effort and investment made most recently in IT transformation, integration and consolidation.
“It would be massively disruptive in terms of BSS/OSS strategy and evolution,” says Newman. “It can take operators several years to build IT systems that sit across previously separate businesses, and now they would have to separate out these systems again.”
